Target Funds becoming bad investment

[Scanner]

Target-Date Funds: Another Bad Year? - Yahoo! Finance

Not sure if this was talked about here but I know the mainstream advice here has been to pursue these for novice investors.

I have to wonder why there is such a big discrepancy on returns from an S&P 500 and a target fund, esp. as they approach the target date.

Congressional hearings may have been appropriate when you think about all the college money locked up in these vehicles.

[jpg7n16]

Originally Posted by Scanner

I have to wonder why there is such a big discrepancy on returns from an S&P 500 and a target fund, esp. as they approach the target date.

Because they're not tracking vs the S&P 500. You can't compare an asset allocation fund against 1 specific asset class. Target date funds don't compare to just the S&P 500 or just the Bond index, because that's not how they're structured.

Step 1 is finding an appropriate benchmark.


Let's take Vanguard's for instance:

VTXVX: https://personal.vanguard.com/us/fun...T#hist=tab%3A2

Currently:
40.3% in Whole Market Index
40.1% in Total Bond Market Index
16.7% in International Index
2.9% in Inflation protected securities

So let's look at the 1 year return of each piece vs an appropriate benchmark:
Whole Market (use Wilshire 5000: Index Calculator Result): 0.61%
Bond Market (use Barclays Aggregate: iShares Barclays Aggregate Bond Fund (AGG): Overview - iShares): 7.58%
International (use Dow Jones Global Index : https://www.google.com/finance?q=INDEXDJX%3AW1DOW#): -9.91%
Inlation Protected (use Barclays TIPS fund: https://www.google.com/finance?q=inf...otected+index#): 7.84%

Take the weighted average expected return of the indexes based on current portfolio structure:
(40.3%)(0.61%)+(40.1%)(7.58%)+(16.7%)(-9.91%)+(2.9%)(7.84%) = 1.86% expected return

Vanguard Fund returned 1.71% last year (https://personal.vanguard.com/us/fun...T#hist=tab%3A1). Which is not all that different from the expected average. Only 0.15% off.



The problem is that you are comparing a basket of apples, oranges, bananas and grapes to only apples and only oranges, and wondering why it looks so different from each group. You forgot to account for those international bananas And international bananas were spoiled this year, which brought down the health of the overall basket. (Have you heard about Europe this past year? Greece? Not too good for the portfolio as a whole)

[Scanner]

Yeah, but if the S&P 500 returned 2% and the Aggregate Bond Index returned 7%. . .shouldn't a TArget fund at least be somewhere in the middle? (since a target fund is a mix)

Is this not a reasonable expectation of a passive investor?

A recent article in The Wall Street Journal discussed how many target-date funds "missed their mark" in 2011. The article goes on to state that the average target-date 2015 fund lost 0.4 percent in 2011. This compares poorly with the S&P 500's gain of 2.1 percent and the Barclays Capital U.S. Aggregate Bond Index's 7.8 percent return.

I dunno. . .sounds like "smoke and mirrors" answer to me. . .like something I'd hear from a financial advisor working for one of the biggies. . .like, "Oh, well, we're different.. .apples and oranges, Mr. Investor. . .now please keep dollar cost averaging and send your monthly check in.

C'mon. . .there's no excuse when a bond fund is doing well for a year for a Target 2015 fund to actually lose money. . .my granny could manage money better than that and throw a football better than that.

[jpg7n16]

Originally Posted by Scanner

Yeah, but if the S&P 500 returned 2% and the Aggregate Bond Index returned 7%. . .shouldn't a TArget fund at least be somewhere in the middle? (since a target fund is a mix)

But international returned -9.91% this year. Target date funds aren't only domestic stocks and domestic bonds.

Is this not a reasonable expectation of a passive investor?

No, it's not. Unless you wanted a portfolio with 0% international exposure. Which would have helped this year, but hurt in other years.

[Scanner]

I could get on board if it was Target 2025 and the international brought you down. . .there must be an unprofessional expectation of how safe international markets are right now then.

I would think, if I was to retire (or pay for college) in 3 years, and with that expectation came I will need the money, most of my holdings would be in bonds and not stocks. Like 80% bonds/cash and 20% stocks at the most.

Was that -9.8% an international bond or stock return?

I don't know. . .it could be perhaps more an indictment on passive investing. . .Europe is circling the drain and yet a Target Fund prospectus says, "Gee, we will always hold 20% international. . .it's our mission to throw your money down the drain.". . .maybe not the brightest way to go about business.

Of course, then again, once again, ONCE AGAIN, it could be the investors fault and not Wall Streets. . .

[jpg7n16]

Originally Posted by Scanner

I dunno. . .sounds like "smoke and mirrors" answer to me. . .like something I'd hear from a financial advisor working for one of the biggies. . .like, "Oh, well, we're different.. .apples and oranges, Mr. Investor. . .now please keep dollar cost averaging and send your monthly check in.

Yeah, well they are different. This is like trying to explain why you should have stocks in your portfolio after a down year in the market. You'll be investing for more than just 1 year, and it's pretty terrible to base this year's portfolio on last year's returns.

If you're that pissed off about a 1 year performance, then just look at the past 5 year reutrns.

VTXVX: 2.54%
S&P 500: -0.33%

C'mon. . .there's no excuse when a bond fund is doing well for a year for a Target 2015 fund to actually lose money. .

Yes, there is. You're planning to RETIRE in 2015, not DIE in 2015. Bonds alone won't provide income for the next 30 years. You need some growth.

And America isn't the only place with growth in the world, so you need some international allocation.

This just happened to be a bad year for international funds. But you weren't complaining in 2003 when the international portion gained 40% (VGTSX Performance Overview | VANGUARD TOTAL INTERNATIONAL ST Stock - Yahoo! Finance ). Oh and the S&P 500 made 28% that year and bonds made 4.9%. It's easy to pick and choose a year when 1 outperformed the other. And there are several years when international did better than domestic.

Just do some historical comparisons and you'll be happy. (well probably not, but you should be)

VTXVX Performance Overview | VANGUARD TARGET RETIREMENT 2015 Stock - Yahoo! Finance
FUSEX Performance Overview | SPARTAN 500 INDEX FUND INVESTOR Stock - Yahoo! Finance

It's good to have an international piece in your portfolio.

.my granny could manage money better than that and throw a football better than that.

Can she?

Why Average Investors Earn Below Average Market Returns

I don't care if Brett Favre is your granny, a target date fund would likely have helped her out.

[jpg7n16]

Originally Posted by Scanner

I could get on board if it was Target 2025 and the international brought you down. . .there must be an unprofessional expectation of how safe international markets are right now then.

Would you have said the same thing about the US market after 2009? It was doing pretty awful then. It's come a long way back now. Even the bond market tanked. And 1 money market fund broke the dollar. So maybe there were unprofessional expectations of how safe it was to invest in anything. Just hold everything in cash.

But oh wait, there was inflation that year. So even cash lost money.

There's always someone out there who says that Warren Buffet has lost his touch whenever the S&P earns more than his portfolio did that year. He's lost his judgment, it can't be done, etc. But over time, he still crushes the market. Although people love to judge him based on 1 year returns, it's foolish. Likewise with Target Date funds - saying they're worthless after 1 year of a poor international performance is absurd.

I would think, if I was to retire (or pay for college) in 3 years, and with that expectation came I will need the money, most of my holdings would be in bonds and not stocks. Like 80% bonds/cash and 20% stocks at the most.

College is different. You'll deplete the account within 4 years. Those college target date funds are structured very differently than retirement target date funds are. Retirement you'll deplete over 20-30 years. 80% bonds would be too much for a 30 year time horizon.

Think about that - when you save for your kid's college when they're 2, you use a lot of stocks - because college is 15-20 years away. Well so is age 80+ when you retire. Your whole account shouldn't be in stocks because you need some of it soon, but for a good chunk of it, you won't need it for 15+ years.

40% domestic stocks and 15% international stocks is completely reasonable for someone age 62.

Was that -9.8% an international bond or stock return?

International stocks.

I don't know. . .it could be perhaps more an indictment on passive investing. . .Europe is circling the drain and yet a Target Fund prospectus says, "Gee, we will always hold 20% international. . .it's our mission to throw your money down the drain.". . .maybe not the brightest way to go about business.

Possibly. But studies have shown that long term passive investing outperforms an average investor trying to time the market. See link above.

There is no way to guarantee your portfolio will have the highest return of all categories each and every year. It's just impossible to predict the future.

Of course, then again, once again, ONCE AGAIN, it could be the investors fault and not Wall Streets. . .

No more than it was the investors fault that the market went up this year.

[Petunia 100]

Originally Posted by Scanner

Yeah, but if the S&P 500 returned 2% and the Aggregate Bond Index returned 7%. . .shouldn't a TArget fund at least be somewhere in the middle? (since a target fund is a mix)

Is this not a reasonable expectation of a passive investor?

Passive investing refers to investing via index funds. Most target date funds are actively managed. Just a clarification.

Yes, if a target fund holds only the S & P 500 and a total market bond fund, one would expect the return to be a weighted average of the those two indexes.

[MonkeyMama]

I agree with jpg. The S&P has nothing to do with the holdings in most Target Retirement funds. I thought the same thing initially, but didn't have a chance to reply.

I'd think the average person who has no clue what they are doing would be very well served by a Target Retirement date fund.

[kork13]

Originally Posted by MonkeyMama

I agree with jpg. The S&P has nothing to do with the holdings in most Target Retirement funds. I thought the same thing initially, but didn't have a chance to reply.

I'd think the average person who has no clue what they are doing would be very well served by a Target Retirement date fund.

Doubly agree with JPG and MM... Target date funds are a different beast, and can't be compared against a single benchmark. The biggest dangers I see in a poorly managed target date fund are the potential for high expenses and poor allocations. Scanner does have a point, that an income fund (for people already retired or about there) should be heavily weighted in bonds, dividend stocks, and the like. That, I think, is where some have failed their investors recently. Some target date funds have made their portfolios more stock-heavy than might be prudent, and over the last few painful years in the stock market, those funds (or rather, their investors) have been burned. All of that said, I've been quite happy with both of the target date funds I've used, and do think that they are great for someone who wants a simple yet diverse portfolio -- as long as they do enough research to understand the risks involved with what they're investing in.

[jteezie]

You want to compare to something that matches the plan's target like:

DJTGT25 = Dow Jones Target 2025 Index
TZI = iShares S&P Target Date 2025 Indx Fd ETF

Just a note: any 3 letter type Index benchmark starting with T (like TZI) is a widely used industry standard.

[kv968]

Originally Posted by Scanner

I would think, if I was to retire (or pay for college) in 3 years, and with that expectation came I will need the money, most of my holdings would be in bonds and not stocks. Like 80% bonds/cash and 20% stocks at the most.

Then in 3 years when interest rates go up, bond funds tank and stocks (domestic and int'l) go up we can come back and argue why the funds didn't have more in stocks since I'm planning on living past my retirement date and the 2% I'm getting from the bonds isn't cutting it.

[Scanner]

Doubly agree with JPG and MM... Target date funds are a different beast, and can't be compared against a single benchmark. The biggest dangers I see in a poorly managed target date fund are the potential for high expenses and poor allocations. Scanner does have a point, that an income fund (for people already retired or about there) should be heavily weighted in bonds, dividend stocks, and the like. That, I think, is where some have failed their investors recently. Some target date funds have made their portfolios more stock-heavy than might be prudent, and over the last few painful years in the stock market, those funds (or rather, their investors) have been burned. All of that said, I've been quite happy with both of the target date funds I've used, and do think that they are great for someone who wants a simple yet diverse portfolio -- as long as they do enough research to understand the risks involved with what they're investing in.

Sorry I bugged out of the conversation. . .Kork makes the point I am trying to make. . .a Target Fund should be an income fund within 3 years of arrival. At least I was assuming as much in the college target funds I am in. (I don't use Target funds for my retirement - I take more risks).

I guess I see the difference between college and retirement. . .the faster rates of depletion. Point made.

Do we then need to have different funds for different goals? Why the universal "Target" then?

A T.Rowe Price Target College 2015 and a T. Rowe Price Target Retirement 2015?

C'mon. . .this is fundamental investing. . .you don't take as many risks with your client's money as you may take.

No one wants to wake up and 9% of Junior's college money is evaporated to the 1%.

[jpg7n16]

Originally Posted by Scanner

Kork makes the point I am trying to make. . .a Target Fund should be an income fund within 3 years of arrival.

I respectfully disagree. IMO, within 3 years of beginning retirement, a retirement fund should be allocated to last another 30-40 years. That requires the growth that stocks alone can provide. The goal for retirement isn't to build up a ton of money on the day you retire - it's to make your money last throughout your retirement.

Do we then need to have different funds for different goals? Why the universal "Target" then?

A T.Rowe Price Target College 2015 and a T. Rowe Price Target Retirement 2015?

Yes. You absolutely need different funds for different goals. You should invest very differently for a 30 year period as opposed to a 4-5 year period.

In fact here are the different options T Rowe Price offers:

College: College Savings Plans: Portfolio Options - T. Rowe Price
At enrollment: 20% stocks, 40% bonds, 40% cash

Retirement: Mutual Funds: Retirement Funds from T. Rowe Price
At retirement: 55% stocks, 45% bonds

T Rowe Price's retirement target funds have nearly 3x as much stocks as their college target funds do.

C'mon. . .this is fundamental investing. . .you don't take as many risks with your client's money as you may take.

Exactly, and fundamental investing teaches that time horizon also plays an important role in determining appropriate investment choice.

FINRA - Getting Ready to Invest: Your Time Frame
Beginners' Guide to Asset Allocation, Diversification, and Rebalancing

From: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing

The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

• Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager's college education would likely take on less risk because he or she has a shorter time horizon.